Subprime Fallout from Goldman Sachs Bundle of Mortgages

A deal came back to haunt Fabrice Tourre, a former Goldman Sachs trader, when a federal jury in Manhattan found him liable for civil securities fraud.

Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy.

In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era.
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Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal has spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond, the GSAMP Trust 2007 NC1.

Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value.

Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy.

Fannie Mae, the mortgage finance giant now owned by the federal government, bought the largest slice of the Goldman deal. In 2008, Fannie was bailed out and taken over by the government, effectively transferring all its assets, including the Goldman bond, into taxpayers’ hands.

Fannie’s regulator, the Federal Housing Finance Agency, is suing Goldman and many other banks to recoup losses on bonds that the company bought. The agency asserts that the four Goldman bankers who signed the bond’s documents were directly responsible for what it says were misstatements and omissions in the deal. None of the men work for Goldman anymore.

Three-fourths of the borrowers in the deal have fallen well behind on their payments at some point, according to a special analysis of the deal performed by the Federal Reserve Bank of Boston. Many of those people have lost their houses or will lose them. Nearly half the loans in the bond have been in foreclosure proceedings since it was issued, according to the Boston Fed.

Read more about the Goldman bond here:

  • Egbert Pellington

    I think the Federal Housing Finance Agency should go after Goldman to recoup losses. What a mess!

  • Brent Stewart

    News like this doesn’t surprise me anymore, but I still hate to hear about people like this. Is the small personal gain worth the price that others have to pay? I don’t think so.